Spotting an ailing company is an inexact science, says David Stevenson – but a solid analysis of Goldtrail would have rung alarm bells
The ever-so-sudden demise of Goldtrail poses a fascinating question – how do you spot a turkey about to meet its makers in administration hell?
How could a company that seemed to be trading profitably and paying out bills in the morning suddenly collapse by the afternoon? I’ve spent many years investigating everything from botched transformations and painfully sad administration debacles to egregious corporate fraud, and I have a short answer and a long answer.
The short answer is that there are no really good rules that help you spot trouble in advance – terrible things happen for all sorts of reasons that can’t be summarised on a risk or credit report.
The long answer is that you should of course follow the cashflow, check the current liabilities and assets mix and then scrutinise the credit rating – but this won’t avoid disasters such as Goldtrail.
Let me explain what went wrong at a company called Aero Inventory. This fast-growing company (or at least it was fast-growing until it went bust) was a darling of the stockmarket and seemed to have a great story. It in effect managed the inventory flow of stocks for the airline industry, sourcing all those expensive but critical engineering parts that keep the planes in the sky.
The top line was booming, paper profits were shooting up and everyone was happy. But beneath the surface there were signs – the cashflow was terrible and the book of current assets and current liabilities contained items that seemed to sit in stock stores for an inordinate amount of time.
A few nasty vulture hedge fund types I know had spotted this advance and tried to short the shares, basing their argument on the cash flow deterioration. But that attack failed year after year. Cashflow was bad but the company seemed to impress everyone sufficiently to raise both debt funding and new equity.
Then it all went horribly wrong. The administrators were called in by banks who clearly weren’t going to put up with rising debts anymore. Game over.
So deteriorating cashflow and stock inventories were the clue, but they didn’t put the company into administration. That task belonged to everyone’s favourite people, the banks.
A few weeks after the debacle I managed to talk to a banker involved in the affair – off the record of course – and he got right to the point: “Yes, the cashflow signs were there but what really did it for us was that the SWOT analysis just didn’t add up. Someone took a step back, looked at this company, and said this isn’t working. It was kind of obvious really to everyone except all those involved up close”.
And that, dear reader, is the simple rule you need to follow. Bad credit ratings can simply be a sign of trouble, not a flawed business model. Negative cashflow trends can hit the best of us. Rising stocks levels can indicate either a buyers’ strike or margin inflexibility.
But what really makes the difference is simple business common sense. Ask a good analyst to run a strengths, weaknesses, opportunities and threats (SWOT) analysis on your main customer/competitor and then take a step back and ask whether the business model stacks up. I’m no expert on Goldtrail but even a cursory examination of this story suggests to me that a good SWOT analysis would have come back with some big fat negatives.
Over at Aero Inventory the SWOT analysis revealed that this business would never really produce enough cash to keep paying for all the new stockparts and that sooner or later the coffers would run dry.
More trouble at easyJet?
One last completely unrelated observation, on a company that is very far from being in mortal threat. Good old Easyjet just can’t seem to get a handle on its problems. Its dispute with Stelios is clearly a royal pain in the butt, but at the weekend I read a far more depressing story.
Apparently pilots have come up with a transformation plan, as turning the airline around will be a “huge challenge because of what has been going on,” according to BALPA General Secretary Jim McAuslan.
Obviously the Stelios tiff is troubling staff – “He is much admired in easyJet but risks going from hero to zero and damaging the very brand on which his good name comes,” suggests McAuslan.
But then he goes for the kill: “The thing that has hit the hardest is the decision by former chief executive Andy Harrison to freeze pilot recruitment, which has contributed to a pilot shortage. But there have been other unwise cost cutting measures; one example was a proposal not to provide pilots with tea or coffee, which would have saved very little money but cost a fortune in lost goodwill.”
Now I’m no PR guru but even parsimonious investors don’t like trouble being created for trouble’s sake. Bad PR creates bad IR (Investor Relations).
If you’re going to kick up a storm as BA has done, do it for a profoundly good reason – like a major structural impediment to change and future profitability. Pick your fights carefully and don’t destroy a staff culture if your business is fundamentally sound and the brand is thriving. Investors worry that this is a sign of weakness and start marking the shares down.